Pri­vate Con­cerns

Liu Qiao:

NewsChina - - CONTENTS - By He Bin

In early Septem­ber 2018, for­mer banker Wu Xiaop­ing posted a short es­say on­line in which he ar­gued that pri­vate en­ter­prise has ac­com­plished its mis­sion to help the pub­lic econ­omy de­velop and “should grad­u­ally step aside.” His post, since deleted, went vi­ral and re­ver­ber­ated in aca­demic and in­dus­trial cir­cles in China, caus­ing con­cern over the fate of the large num­ber of pri­vate en­ter­prises in the coun­try.

Of­fi­cial data shows that by the end of 2017, China was home to 65 mil­lion in­di­vid­u­ally-owned busi­nesses and over 27 mil­lion pri­vate en­ter­prises, em­ploy­ing 341 mil­lion peo­ple. China's non-pub­lic sec­tor con­trib­utes more than 60 per­cent of the coun­try's GDP growth and brings in over half of its fis­cal rev­enue.

On Novem­ber 1, 2018, Chi­nese Pres­i­dent Xi Jin­ping presided over a sym­po­sium on the pri­vate sec­tor which aimed to in­still con­fi­dence at a time when pri­vate en­ter­prises are strug­gling to make a profit and tackle grow­ing debt.

Xi de­manded the im­ple­men­ta­tion of poli­cies and mea­sures in six as­pects to cre­ate a bet­ter en­vi­ron­ment for the pri­vate sec­tor and to help them over­come their dif­fi­cul­ties, in­clud­ing eas­ing the bur­den of taxes and fees, ad­dress­ing the dif­fi­cul­ties and high cost of fi­nanc­ing and re­mov­ing hid­den re­stric­tions.

“Over the past 40 years, the pri­vate sec­tor of the econ­omy has be­come an in­dis­pens­able force be­hind China's de­vel­op­ment,” Xi said.

“Any word or ac­tion that de­nies, doubts or wa­vers over the coun­try's ba­sic eco­nomic sys­tem is not in line with the prin­ci­ples and poli­cies of the Party and the coun­try. All pri­vate com­pa­nies and pri­vate en­trepreneurs should feel to­tally re­as­sured and de­vote them­selves to seek­ing de­vel­op­ment.”

Newschina has se­cured an ex­clu­sive in­ter­view with Liu Qiao, Dean of the Guanghua School of Man­age­ment at Pek­ing Uni­ver­sity, to dis­cuss the sta­tus of China's pri­vate sec­tor, its unique role and the chal­lenges that loom large.

Newschina: China's pri­vate en­ter­prises face three main chal­lenges of the mar­ket, fi­nanc­ing and trans­for­ma­tion. Do you agree?

Liu Qiao: In my view, an irk­some chal­lenge is the trans­for­ma­tion of pri­vate en­ter­prises. Over the past 40 years of China's re­form and open­ing-up, the big­gest change to Chi­nese en­ter­prises has been the es­tab­lish­ment of a mod­ern cor­po­rate sys­tem and its grad­ual im­prove­ment. Chi­nese en­ter­prises tend to be ea­ger to ex­pand in scale but largely ne­glect the cre­ation of value and re­turns on in­vest­ment. When busi­ness is boom­ing, en­ter­prises can scale up through bank loans, but if the in­vest­ment ef­fi­ciency is low, it brings pres­sure to the fi­nan­cial sys­tem, lead­ing to high lever­age and over­ca­pac­ity in many sec­tors. Banks then are afraid to pro­vide loans to pri­vate en­ter­prises. In short, pri­vate en­ter­prises have to pur­sue value cre­ation which is also a re­quire­ment of the high-qual­ity de­vel­op­ment China is pur­su­ing.

NC: Chi­nese Pres­i­dent Xi Jin­ping said the pri­vate sec­tor should only grow stronger in­stead of be­ing weak­ened and march to­ward a broader stage. What does ‘the broader stage' mean?

LQ: Along­side China's drive to the mar­ket sys­tem, more busi­ness ar­eas are ex­pected to open to the pri­vate sec­tor. Pri­vate en­ter­prises will play an in­creas­ingly ac­tive and cru­cial role in the coun­try's eco­nomic sys­tem. China has 111 en­ter­prises on the For­tune 500 list in 2018, in­clud­ing more than 20 pri­vate com­pa­nies. Pri­vate en­ter­prises are more flex­i­ble and mar­ket-ori­ented, and they have their own ad­van­tages in China's eco­nomic tran­si­tion.

NC: A high­light of the six pol­icy mea­sures to sup­port the pri­vate sec­tor was the pro­posal to make a new re­la­tion­ship be­tween the gov­ern­ment and busi­ness. How do you see that play­ing out?

LQ: The Chi­nese gov­ern­ment has played a piv­otal role in the mak­ing and de­vel­op­ment of China's mar­ket sys­tem over the past 40 years. This top-level pol­icy de­sign, cou­pled with the re­form and open­ing-up pol­icy has re­vi­tal­ized the mar­ket, en­abling China to be­come a key link in the global in­dus­trial chain. Mean­while, China's large pop­u­la­tion and the global mar­ket have sped up growth in the man­u­fac­tur­ing sec­tor, mak­ing the rise of large-scale pro­duc­tion in China pos­si­ble. China's high-speed eco­nomic growth hinges on the gov­ern­ment's ca­pa­bil­ity and de­ter­mi­na­tion to make and im­ple­ment long-term strate­gic plan­ning.

Along with eco­nomic growth, the re­la­tion­ship be­tween the gov­ern­ment and busi­ness is chang­ing rapidly. The per­fect re­la­tion­ship would be that the gov­ern­ment tries to cre­ate a fair and trans­par­ent en­vi­ron­ment, mak­ing the mar­ket the cru­cial player to al­lo­cate re­sources. A sim­ple bi­nary di­vi­sion of gov­ern­ment and mar­ket should be avoided. It is also cru­cial to in­crease the gov­ern­ment's ef­fi­ciency to achieve an ef­fec­tive com­bi­na­tion of mar­ket mech­a­nisms and gov­ern­ment reg­u­la­tion.

NC: How should we un­der­stand the con­cept of there be­ing a level play­ing field for the pri­vate and State sec­tors?

LQ: There will be a level play­ing field if the six pol­icy mea­sures are im­ple­mented. There has long been a sit­u­a­tion of un­fair com­pe­ti­tion be­tween China's State-owned en­ter­prises (SOES) and pri­vate en­ter­prises. Pri­vate com­pa­nies, for ex­am­ple, are con­stantly plagued by fi- nanc­ing dif­fi­cul­ties. We found in our re­search that pri­vate en­ter­prises have to pay an in­ter­est rate 1.38 per­cent higher than SOES if they are listed com­pa­nies in the same in­dus­try with the same firm size. Dur­ing the sym­po­sium, fi­nan­cial in­sti­tu­tions were or­dered to re­solve the is­sue of dif­fi­cul­ties in ob­tain­ing credit and the high cost of fi­nanc­ing for pri­vate en­ter­prises. The pri­vate sec­tor is sup­ported to par­tic­i­pate in fair com­pe­ti­tion and will be treated with­out dis­crim­i­na­tion.

NC: What is the big­gest chal­lenge for the six poli­cies and mea­sures to cre­ate a bet­ter en­vi­ron­ment for pri­vate en­ter­prises?

LQ: In my opin­ion, the big­gest chal­lenge will be the im­ple­men­ta­tion. To be spe­cific, how gov­ern­ments at all lev­els can take con­crete ac­tions to make all these poli­cies take ef­fect and en­able pri­vate en­ter­prises to ac­cess sup­port from the gov­ern­ment. Mean­while, gov­ern­ment at all lev­els has to fig­ure out the new type of re­la­tion­ship be­tween the gov­ern­ment and busi­ness and re­al­ize what the gov­ern­ment should do, bring into full play the roles of the gov­ern­ment and mar­ket, and aid pri­vate en­ter­prises in their trans­for­ma­tion.

For ex­am­ple, as stock-pledged loans are highly risky, lo­cal gov­ern­ments should try to sup­port pri­vate en­ter­prises. There needs to be an in-depth anal­y­sis as to what kind of sup­port to of­fer, what would be the with­drawal mech­a­nism, how to de­sign poli­cies and as­sess the ef­fect of poli­cies. A clear tar­get is highly nec­es­sary in or­der to make pri­vate en­ter­prises feel they have sub­stan­tial back­ing.

NC: Just like the sci­ence and tech­nol­ogy in­no­va­tion board that will be set up with a pi­lot reg­is­tra­tion sys­tem in the Shang­hai Stock Ex­change?

LQ: The big­gest prob­lem for China's cap­i­tal mar­ket is the lack of ex­cel­lent listed com­pa­nies. Our re­search shows that from 1998 to 2017, the re­turn on cap­i­tal in­vest­ment of listed com­pa­nies on China's A-share mar­ket is only three to four per­cent on av­er­age, far lower than com­pa­nies listed on the US mar­ket which have had [re­turns of] 10 per­cent on av­er­age over the past 100 years. China needs a cap­i­tal mar­ket that can rec­og­nize and cul­ti­vate ex­cel­lent listed com­pa­nies. It is high time to re­form the list­ing and delist­ing sys­tems for en­ter­prises, and bring in a reg­is­tra­tion sys­tem for IPOS to build a sound mar­ket and reg­u­la­tion sys­tem. The sci­ence and tech­nol­ogy in­no­va­tion board in Shang­hai is aimed at re­form­ing the sys­tem of stock is­suance and im­prov­ing the cap­i­tal mar­ket.

NC: What are pri­vate en­ter­prises lob­by­ing for most?

LQ: To sur­vive and stand against the chal­lenge of cor­po­rate trans­for­ma­tion. It is, how­ever, un­re­al­is­tic to en­sure all pri­vate en­ter­prises sur­vive. For those en­ter­prises that pos­sess key re­sources but lack a busi­ness model and core com­pet­i­tive­ness to pros­per, it is even more im­por­tant to trans­form them­selves. As for gov­ern­ment sup­port, a one-size-fits-all mea­sure should be avoided. To sum up, it is the best pol­icy for pri­vate en­ter­prises to in­crease gov­ern­ment ef­fi­ciency and let the mar­ket play the de­ci­sive role in al­lo­cat­ing re­sources.

Chi­nese Pres­i­dent Xi Jin­ping de­liv­ers a speech at a con­fer­ence about pri­vate en­ter­prises at the Great Hall of the Peo­ple, Bei­jing on Novem­ber 1

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